Dollar, Treasuries Reset For NFPs After Housing Data Neutralizes ISM

How Did/Will The Markets React?

The US capital markets were in for another fundamental surprise Thursday, but not the same sort as yesterday. Though the quality of the session’s indicators were considerably reduced from the GDP and FOMC events the day before, the top market mover 2006 was on deck. When the ISM manufacturing read printed its second contraction in three months and its worst monthly print since April of 2003, the market was ready to the force EURUSD through resistance and shake T-notes from their two-month channel. However, coming in low on the radar, a shocking jump in pending home sales sapped the anti-dollar move of momentum before it even had a chance to get off the ground. In reality, the market was well prepared for the nationwide factory report following the unexpected contraction in the NAPM’s Chicago Purchasing Managers Index. The housing data on the other hand was a pleasant surprise for policy makers and dollar bulls alike. The consensus for sales of previously occupied homes held an overall positive tone on the basis of strong starts and permits for the period. However, the modest contraction in the existing home sales indicator for the same period helped to anchor the market’s informal projections. This blurry outlook leveraged the reaction to the biggest jump in pending sales since March of 2004. Now, the market turns to tomorrow’s labor numbers with a moderate outlook. A market consensus of 150,000 print, would mark the third consecutive month NFPs have come in line with the Fed’s ‘magic’ number that relates to stable economic growth. At the same time, the placid outlook could catch the market off guard for a surprise figure.

Bonds – US 10-Year Note Futures

Treasuries have rallied significantly off of the lows reached less than a week before. Despite a fairly even mix of macro-economic data over the past few sessions, the ten-year note has held its steady advance. Now the next big leg for the benchmark government paper rides on the notoriously volatile employment numbers. The headline payroll report will take precedence as usual. However, the earnings indicator should be considered for the potential risk of a deceleration from its six-year high 4.2 percent pace. As it stands, the technicals will mesh well with the day’s fundamental triggers. With the top of a two-month old channel in jeopardy, a weak employment report could mark the beginnings of a new leg higher. Alternatively, strong labor numbers may lead to a week's extension of a mature trend.

FX – EUR/USD

The Euro made yet another test of significant resistance near 1.3050 following today’s ISM figure, but a retracement left the EUR/USD firmly below ahead of tomorrow’s Non-Farm Payrolls report. Currency traders are clearly reluctant to force stronger moves in the heavily traded pair, as any surprises in tomorrow’s US data could cause a significant shift in overall market sentiment. In fact, a positive surprise in last month’s NFP’s was the catalyst for declines below current resistance levels. The currency pair subsequently stands at a significant crossroads. Given the fact that predicting NFP reports is akin to predicting New York weather, it is best to simply highlight possible trading scenarios.

If numbers print considerably better than consensus estimates, the EURUSD will likely test nearest support of a 4-month rising trendline at approximately 1.2950. A close below 1.2950 opens the pair to a re-test of the previous range-high at 1.2900—marking a clear bearish turn for the European currency. In the equally likely case of a disappointing NFP report, the EURUSD has the potential to rip through similarly significant levels at 1.3047. According to our own Technical Analyst Jamie Saettele, such a break would lead the currency pair to 1.3098 and warrant a bullish outlook on the most actively traded currency pair.

Equities – S&P 500 Index

US equities defied previously bearish price action, with the S&P 500 rocketing to fresh 6-year highs through the day’s trade. Bullish Personal Spending and Income figures were enough to drive retail-linked stocks significantly higher, with other sectors benefiting from spillover into the broader market. The outlook for overall indices has greatly improved as a result, but the initial break higher could be short-lived if tomorrow’s NFP reports surprise higher. Unlike their forex counterpart, US stocks typically respond negatively to strong changes in Non-Farm Payrolls. As such, it will be important to watch for any surprises in the top-tier data, with risks arguably remaining to the downside for recently surging US stock markets. Given a week of strong gains, it is all too likely that speculators will look for any excuse to book profits ahead of the weekend.